Tariffs And Stelco Acquisition Will Strengthen Future Competitive Position In Steel Industry

Key Takeaways

• Tariffs on steel imports are poised to benefit Cleveland-Cliffs, enhancing domestic demand and boosting revenues and earnings.
  
• Debt reduction and cost structure improvements aim to enhance financial flexibility, margins, and profitability.
  
• High interest rates, trade distortions, and reliance on tariffs pose ongoing risks to Cleveland-Cliffs' revenue and market share, impacting financial stability and earnings.

Catalysts

Operates as a flat-rolled steel producer in the United States, Canada, and internationally.

• The implementation of 25% tariffs on steel importers is expected to benefit Cleveland-Cliffs by reducing competition from foreign steel producers, potentially increasing domestic steel demand and pricing. This is likely to positively impact Cleveland-Cliffs' revenues and earnings.
  
• The acquisition of Stelco is anticipated to bring synergies of $120 million by year-end 2025, with potential for even greater efficiency gains, potentially improving net margins and overall profitability.
  
• Cleveland-Cliffs is well-positioned to capitalize on expected demand recovery in the automotive sector and other core segments, driven by new and existing programs, which should support growth in revenue and earnings.
  
• Management is committed to significant debt reduction using available free cash flow, which could enhance the company’s financial flexibility and potentially increase earnings per share by lowering interest expenses.
  
• The focus on improving cost structures, including a guided $40 per net ton cost reduction in 2025, is expected to strengthen operating margins and enhance earnings, especially given improved demand dynamics.

Cleveland-Cliffs Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cleveland-Cliffs's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.9% today to 1.0% in 3 years time.
• Analysts expect earnings to reach $235.8 million (and earnings per share of $0.41) by about March 2028, up from $-754.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $432 million in earnings, and the most bearish expecting $39.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.9x on those 2028 earnings, up from -6.4x today. This future PE is greater than the current PE for the US Metals and Mining industry at 21.2x.
• Analysts expect the number of shares outstanding to grow by 4.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.25%, as per the Simply Wall St company report.

Cleveland-Cliffs Future Earnings Per Share Growth

Risks

• Cleveland-Cliffs experienced weakened demand in 2024, particularly from the automotive sector and lagging construction activity, leading to challenges in pricing and resulting in an adjusted EBITDA loss for Q4, which impacts earnings.
  
• The company's operations were impacted by high interest rates, which limited the purchasing ability of their service center customers, potentially affecting future revenue growth.
  
• Persistent trade distortions, such as dumping and overproduction by foreign steel producers, present ongoing competitive risks, which could negatively impact Cleveland-Cliffs' ability to maintain its market share and affect revenue.
  
• There is reliance on tariffs for competitiveness, and any changes or reductions in tariffs could impact domestic pricing and market dynamics, potentially affecting revenue and margins.
  
• Cleveland-Cliffs' leverage remains above its target ratio due to recent acquisition activity, which could limit financial flexibility and pose risks to earnings if debt reduction targets are not met.

Valuation

• The analysts have a consensus price target of $12.278 for Cleveland-Cliffs based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.7 billion, earnings will come to $235.8 million, and it would be trading on a PE ratio of 39.9x, assuming you use a discount rate of 11.3%.
  
• Given the current share price of $9.81, the analyst price target of $12.28 is 20.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.